Bankruptcy in Canada: A Complete Guide to Surplus Income, Exempt Assets & More
Filing for bankruptcy can feel overwhelming, but understanding the key aspects can make the process clearer. Whether you’re dealing with surplus income, wondering which assets you can keep, or trying to figure out which debts get cleared — this guide walks you through the most important details about bankruptcy in Canada.
1. Surplus Income Payments & Bankruptcy Duration
When someone files for bankruptcy, they may be required to make surplus income payments if their monthly income exceeds a government-set threshold. This threshold is based on household size and updated annually.
Each month, you must provide your total household income to your Licensed Insolvency Trustee (LIT). If your income is above the threshold, you’ll need to pay 50% of the extra amount into the bankruptcy estate.
This surplus income also affects how long your bankruptcy lasts:
- First-time bankruptcy: Usually 9 months, extended to 21 months if surplus income is owed.
- Second-time bankruptcy: Normally 24 months, extended to 36 months with surplus income.
2. What Assets Can You Keep During Bankruptcy?
Not everything is lost in bankruptcy. Certain exempt assets are protected under the law and can be retained. These exemptions vary slightly by province but typically include:
- Personal belongings and household furniture
- Tools used for your profession (within specific limits)
- RRSP contributions (excluding those made within the last 12 months)
- A vehicle, up to a certain equity value (e.g., $7,117 in Ontario)
- A portion of your home equity (e.g., $10,783 in Ontario)
It’s important to also disclose any items you’ve sold, transferred, or gifted in the 1 to 5 years before filing. If the sale was below fair market value or intended to hide assets, your trustee or the court can reverse it.
3. Tax Refunds During Bankruptcy
Tax refunds owed for years prior to and including the year you file become part of your bankruptcy estate. These refunds are used to repay your creditors.
Refunds for future tax years (after the year of filing) remain yours and are not affected by the bankruptcy process.
4. Debts That Are Discharged vs. Those That Aren’t
Bankruptcy is designed to give a fresh start by wiping out most unsecured debts, including:
- Credit card balances
- Personal loans and payday advances
- Outstanding utility bills
- Income tax and GST/HST debts
- Student loans (only if you’ve been out of school for 7 years or more)
- Most civil court judgments
However, some debts are not discharged, meaning you’ll still be responsible for them:
- Child and spousal support payments
- Court-imposed fines or penalties
- Debts related to fraud or misrepresentation
As soon as you file for bankruptcy, a legal protection called a stay of proceedings takes effect, stopping all collection efforts, lawsuits, and wage garnishments.
5. What Happens to Your Car and Home?
Secured debts (such as car loans and mortgages) are not eliminated through bankruptcy. As long as you continue making your regular payments, you can keep these assets.
However, if you have equity in these assets that exceeds the allowable exemption, your trustee may require you to either:
- Pay the non-exempt equity, or
- Surrender the asset, which may be sold to help repay your debts.
For example, if you own a home with $50,000 in equity and your province allows an exemption of $10,000, you’ll need to arrange for the remaining $40,000 to keep your home.
In such cases, many people consider a consumer proposal, which allows them to reduce their unsecured debt without risking loss of assets, even if equity is high.
6. Your Duties During Bankruptcy
To complete your bankruptcy and receive a discharge (the official release from your debts), you must fulfill certain legal duties:
- Attend two mandatory financial counselling sessions
- Report your household income and expenses monthly
- Surrender all credit cards to your trustee
- Attend a creditors’ meeting if one is scheduled
- Be truthful about your finances, assets, and liabilities
- Notify your trustee of any major life or financial changes
Failing to complete these duties can result in a delayed or conditional discharge, meaning your bankruptcy may be extended or include additional terms.
Final Thoughts
Bankruptcy is a serious financial decision, but it also offers a path to rebuild. With the right guidance from a Licensed Insolvency Trustee and by staying informed about your obligations and rights, you can navigate the process smoothly and work towards a debt-free future.
If you’re considering bankruptcy or just want to understand your options, speaking with a professional is always the best first step.
